Hands down, the biggest news last week was had in the energy “sector” as oil prices continued their move down, officially moving into bearish territory. Tematica’s Chief Macro Strategist Lenore Hawkins and Tematica’s Chief Investment Officer discussed this on last week’s podcast as well as several other items that continue to fetch their interest – hint: Amazon’s (AMZN) latest moves with Whole Foods (WFM) and Nike (NKE) was one of them as Amazon continues to expand the number of thematic drivers behind its businesses. If you missed the podcast, you can click here, but we do recommend you subscribe on iTunes.

Back to the slump in oil prices … Crude’s slide is due not only to growing supply but also weak demand. Not to sound like a know it all, but supply-demand dynamics are pretty much economics 101, and when we see ramping U.S. supply alongside a slowing domestic economy, it hasn’t been hard to guess where the price of oil is headed. The proverbial second shoe to watch is earnings. We mention this because, according to FactSet, the energy sector is expected to be the biggest contributor to EPS growth for the S&P 500 in the current quarter. With oil at just over $43 per barrel, well below the $51 level it averaged in 1Q 2017 and the $52 mean estimate for the average price of oil for Q2 2017, we’ve started to see Wall Street respond with price target and EPS cuts.

As those analysts recalculate their forecasts, we’re likely to see more negative revisions for energy earnings for the current quarter as well as the back half of 2017.

Why?

Because the current data set does not point to a pronounced pickup in the economy near-term, which now means 3Q 2017. The New York Fed’s Nowcast for 2Q 2017 GDP hit 1.9 percent last week with 3Q 2017 falling to 1.5 percent. The Atlanta Fed’s next update doesn’t hit until later today, but the vector and velocity of its forecast have also been down over the last several weeks. While we often tend to poke some good-natured fun at the Atlanta Fed’s forecasting skills, we would be surprised to see an upward revision given the strong rollover in the Citibank Economic Surprise Index.

If you’re wondering if the consensus GDP expectations for 2Q 2017 and 3Q 2017 have come down in tandem with those for those two Fed banks, the answer would be a resounding no. Per The Wall Street Journal’s Economic Forecasting Survey, the consensus view for 2Q 2017 GDP across more than 60 economists is still sitting at 3.0 percent. The same group sees 3Q 2017 at 2.5 percent.

It seems it’s more than Wall Street oil analysts asleep at the forecasting switch.

“The level of complacency about where markets are today is pretty scary. People are just sort of assuming it’s OK, that it is what it is, and I have to say that I’m a little bit concerned about it.” – Jon Winkelried, CEO of TPG Capital

Given the speed of the economy and ramped up U.S. supply, we don’t see any near-term reversal for oil prices. Moreover, as those revisions happen, the ripple effect will bring down expected earnings growth rates for the S&P 500 as well because the energy sector was forecasted to be the biggest earning contributor for both 2Q 2017 as well as for all of 2017.

The bottom line is there are several sets of expectations that are poised to be moved lower over the coming weeks, and it’s going to make for an interesting 2Q 2017 reporting season. That’s especially true for oil companies, but also for the overall market as well. We suspect corporate outlooks are likely to range from being cautiously optimistic for the second half of the year to guidance being reigned in, which in our view is far more likely given the push out in Trump policy timing as well as all of what we’ve discussed above.

“Although the consumer seems to be growing at a relatively good pace, the corporate side just seems to be in that uncertain phase where they want more certainty in the world before they make the next decisions.”— Tom Montag, COO Bank of America (BAC)

What this means is there is a far greater probability of volatility returning to the market as these revisions are had. If we’re right and EPS expectations for the S&P 500 get trimmed back, we’ll be faced with one of two things:

Either the market becomes that much more expensive than the 17.9x multiple on expected (but still yet to be revised lower) 2017 EPS it closed at on Friday.

Or investors will re-assess the market multiple, likely pushing it lower, as those EPS cuts are made.

It’s a simple rule, but investors pay up for growth but aren’t willing to pay up quite as much when growth is slower than expected.